In recent years, there has been a significant broadening of the foreign investor base represented in CFIUS reviews, with greater activity from emerging markets.
The Committee on Foreign Investment in the United States (CFIUS), which is led by the US Department of the Treasury and made up of US national security and economic agencies, including Defense, State, Justice, Commerce, Energy and Homeland Security, reviews acquisitions of US businesses by foreign persons or businesses.
The parties to the acquisition file a joint voluntary notice with attachments that include annual reports, the deal document and information about the target's US government contracts (if any). A CFIUS review is ostensibly a voluntary process, but in some cases it is effectively mandatory, e.g., acquisitions of cleared defense contractors or assets likely to qualify as critical infrastructure.
CFIUS actively looks for transactions of interest that were not notified and will "invite" parties to submit a filing regarding transactions it would like to review.
TYPES OF DEALS REVIEWED
CFIUS has jurisdiction to review any transaction that could result in control of a US business by a foreign person. "Control" is defined broadly and can include many minority investments. The types of transactions that CFIUS can review are quite varied, including deals structured as stock or asset purchases, debt-to-equity conversions, foreign-foreign transactions where the target has US assets, private equity investments, and joint ventures where the foreign partner is investing in an acquired or contributed US business.
Unlike the French and Chinese national security regimes, the CFIUS statute does not specify what types of industries are relevant to national security. This has given CFIUS substantial leeway to review transactions covering a wide variety of areas, including identity authentication, biometrics, information technology, energy, telecommunications, food safety, financial services, real estate, cyber security and healthcare, as well as industries with a more direct link to national security such as aerospace and defense. External issues unrelated to the structure of the transaction, such as the US business's location in close proximity to sensitive US government assets, can also pose substantial national security concerns.
Accordingly, it is important to consider CFIUS issues in connection with any transaction involving foreign investment (direct or indirect) in a US business with a potential link to US national security.
SCOPE OF THE REVIEW
The CFIUS review process is designed to assess the risk profile of the deal from a US national security perspective. It analyzes the threat posed by the foreign buyer, the vulnerability exposed by the target, and the consequences exposed by the threat and vulnerability put together. Based on that risk profile, CFIUS decides if the deal can proceed with or without mitigation, or whether it needs to be stopped. Often the analysis is done based on the filing with follow-up Q&A. Sometimes the parties will also meet with CFIUS either per the parties' or CFIUS' request.
- The vast majority of deals are approved.
- Where CFIUS has national security concerns, it can impose mitigation conditions that can have significant implications on the foreign investor's involvement with the US business or even ultimately lead to the need to divest the asset.
- A small but notable number of deals are abandoned while going through the process. For example, a Chinese consortium's planned US$2.8 billion acquisition of Royal Philips NV's Lumileds business unit was abandoned due to concerns CFIUS raised about the transaction.
- Only the US President can formally stop a deal, which has happened twice in the history of CFIUS. CFIUS can, however, suggest that parties abandon a deal, or it will recommend a block, at which point parties usually agree to withdraw from the transaction.
TRENDS IN THE REVIEW PROCESS
In recent years, there has been a significant broadening of the foreign investor base represented in CFIUS reviews, with greater activity from emerging markets, such as China, Japan, India and the Middle East, and relatively less participation by more traditional European and Canadian investors. As a result, the risk factors CFIUS considers in its national security analysis have changed to reflect a broader pool of investors.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
It is critical for foreign investors to consider CFIUS issues in planning and negotiating transactions, including with respect to allocation of CFIUS-related risk. The range of mitigation requirements that can be imposed is quite wide (based on the risk profile of the deal), and it is important for buyers in particular to have as clear an understanding as possible with respect to what mitigation requirements would be acceptable to them. As a buyer, you do not want to buy an asset and have CFIUS-imposed mitigation prevent you from achieving your objectives for the deal.
REVIEW PROCESS TIMELINE
The process can often take up to three months from the time the parties submit the joint voluntary notice and its attachments to CFIUS in draft (called a prefiling) to completion. CFIUS typically takes about two weeks to review and comment on the prefiling. Thereafter, once the parties incorporate CFIUS' comments and formally file, CFIUS typically takes a few days to accept the filing and start a 30 calendar-day review process. At the end of the 30 calendar days, the review is either completed or is taken to the investigation phase (which happens in about 40 percent of all filed cases annually). Investigation can take up to 45 calendar days. Thereafter, most reviews are completed. On rare occasions, contentious deals are taken to the President for a decision, who has 15 days to decide. Sometimes, most often when parties are negotiating mitigation terms with CFIUS, and the terms have not been agreed upon at the end of the investigation phase, CFIUS may encourage the parties to withdraw and resubmit the notice to restart the 30-day clock.
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